I’m writing this in January, the month of goals and resolutions. If you’re reading financial blogs like this, maybe you resolved to spend less and save more. Money resolutions rarely work because they often rely on willpower. Despite what you’ve probably heard, budgets and willpower don’t go together. Instead of planning a forced march to discipline your spending, I’ll show you an easier way to spend less automatically.
The Problem With Budgets And Willpower
A lot of moralizing about budgets tells people to avoid sins like smoking, drinking, gluttony, and gambling. Also, we should restrain our impulse buying. All of this restraint and avoidance takes willpower.
But as Oscar Wilde famously wrote, “I can resist anything except temptation.” Saying ‘yes!’, being spontaneous, experiencing novelty–this makes life more fun. We’re not alive simply to complete some financial plan.
Which is good, because researchers are piling up evidence that willpower isn’t the simple and universal magic bullet that moralizers make it out to be. This Vox article gives a good summary.
If you’re born into a wealthy and conscientious family and surround by others like you, it’s effortless to look like you have a lot of willpower. In reality, such people probably rarely feel tempted, and so budgets and willpower aren’t concerns. They probably don’t even need to budget much, because they are automatically conscientious about finances. You want these people as your financial advisors, but maybe not your drinking buddies.
If you feel temptation more than others, but also envy people with healthy finances, how do you budget your willpower and your money?
Budgets Contain Variable Costs and Fixed Costs
Not all monthly budget items are equal. This is quantitatively true–no two amounts are the same. It’s also qualitatively true–some costs are variable while others remain fixed.
Variable costs change from one month to the next. Think travel and gifts. Because they are variable, you can control them from one month to the next. So, it’s easy to think that’s where you should focus your efforts when trying to save money. However, variable costs make up a smaller portion of your overall spending. And, variable costs often fund the fun in life, which means it takes more willpower to cut these.
Fixed costs are those expenses you really must pay and often total the same amount each month. Think rent, car payments, insurance premiums. Because they are fixed, you can’t easily vary them, and so they don’t seem like a place to start when reducing your budget.
Slashing Fixed Costs Save You More Money With Less Willpower
There are several beautiful things about the counterintuitive approach of focusing on fixed costs:
- Fixed costs make up a more significant portion of your expenses. So, a 10 percent reduction in these costs yields more dollars saved than cutting your variable costs.
- Because fixed costs remain constant, once you lower them, they automatically stay lowered month after month. There’s no extra willpower required on your part.
- Fixed costs are just less fun than variable costs, so cut them and have more money for the fun, variable costs.
On the other hand, fixed costs take more effort to change. You’ll be hard-pressed to eliminate a fixed cost completely. And you shouldn’t shortchange yourself on essential adult expenses like insurance and investing to hit your R Minus 10 milestone. But when eyeing your budget, look harder at your fixed costs to save more money, more easily while having more fun.
In a future post, I’ll cover how saving small amounts on big fixed costs can add up.
What’s the Point of a Monthly Budget Anyway?
I dislike the word ‘budget’. I’ve tried setting up categories, tracking expenses, looking at charts. I like charts. Somehow, budgeting at that level doesn’t stick with me.
A budget is to make sure you don’t waste your money. By waste, I mean spending money and getting no value or enjoyment out of it.
So this year, don’t wrestle so much with budgets and willpower. If you’ve prudently pruned your fixed costs and continue to save and invest money, then go ahead and spend what’s left on the variables that make you happy. That’s the real point.